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Office Depot to miss mark
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May 26, 2000: 5:50 p.m. ET
Soft tech sales in May, weak European currencies are hurting 2Q profit
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NEW YORK (CNNfn) - Office Depot Inc., the nation's largest office supply retailer, warned Friday it will miss earnings forecasts by as much as 25 percent in the second quarter, blaming weak technology sales in May.
The Delray Beach, Fla.-based company said earnings would be 18 cents to 20 cents a share. Analysts surveyed by earnings tracker First Call forecast it would earn 24 cents a share in the period. It earned 21 cents a share in the year-ago period.
The news sent shares of Office Depot (ODP: Research, Estimates) plummeting 3 to close at 7-1/2 in trading Friday.
The company's announcement also prompted J.P. Morgan Securities Inc. to lower its rating to "market performer" from "long-term buy." Analysts also lowered the rating on Office Depot rival Staples to "long-term buy" from "buy."
 Office Depot said sales in stores open at least a year, a closely watched measure of retailer strength known as same-store sales, have been a disappointment so far in May.
"While we anticipate some improvement in retail stores performance in June, we feel that any likely improvement in June will not overcome sales weakness earlier in the quarter," Chairman and CEO David Fuente said.
He also said overall April sales came in weaker than expected, contributing to the sluggish performance.
Fuente said the company could not give any guidance on earnings for the second half of the year. First Call forecasts the company will earn 26 cents a share in the third quarter, up from 19 cents a year earlier, and 28 cents a share in the fourth quarter, up from 21 cents a year earlier.
The company said weakness in the euro and the British pound also has hurt, meaning that even though European sales are ahead of plan, revenue is below expectations when converted to dollars. Planned savings from a new supply chain management system also are not being realized as quickly as anticipated.
Fuente also blamed pressure from competitors who operate stores in markets with little or no competition, adding that Office Depot would open future stores in less-competitive markets.
In a research note, J.P. Morgan Analyst Danielle Fox said she lowered Office Depot's rating after company officials told her that competition was heating up and that store pricing may go lower. The company could also provide no guidance on the second half of the year, making valuation difficult.
Fox also lowered her rating on Office Depot competitor Staples.
"Although many of the issues at Office Depot were company-specific, we have been growing less confident in our estimates for Staples as well. The growth rate at retail & delivery is decelerating, but it's unclear to what level," Fox said.
 The risk of an earnings shortfall is rising at Staples because of continued high labor costs and a diminishing gross margin, Fox said. Also, the impact of Internet sales and a too optimistic view for a strong second half also prompted the downgrade.
"...Once the industry makes its way through this difficult transition period, we expect Staples to emerge as a leader, which is why we are lowering our rating to long-term buy rather than market performer," Fox said. "We think growth at Staples is likely to remain solid, but it is slowing."
Shares of Staples (SPLS: Research, Estimates) slipped 1-1/8 to 15-13/16 in trading Friday. 
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OfficeDepot.com
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